The Delaware Court of Chancery last month ruled that McDonald’s Corp’s shareholders are able to sue David Fairhurst for the harm shareholders say he caused the chain for allegedly enabling a toxic culture where sexual harassment thrived, Reuters reports. The ruling signals the first time that the influential court has acknowledged that corporate officers have a legal duty of oversight, an obligation that has traditionally fallen only to directors. Fairhurst, who headed global HR from 2015 to 2019, is being blamed for not carrying out his oversight responsibilities.
Fairhurst argued that he could not be sued since the Delaware judges had in the past placed oversight responsibilities with the board of directors. But the ruling judge, Vice Chancellor Travis Laster, allowed McDonald’s shareholders to move ahead, noting that officers carry out day-to-day operations and it would not be logical to say they have no oversight responsibilities.
“Under Delaware law, corporate officers owe the same fiduciary duties as corporate directors,” Laster wrote in a January 25 decision. “Although no Delaware decision has stated the proposition in so many words, this decision confirms that officers owe a duty of oversight.”
The ruling taking place in Delaware also is significant as more than one million U.S. companies call the state their legal home, Corporate Governance Institute reports. Additionally, about 60% of Fortune 500 companies are incorporated in Delaware. The toxic culture that shareholders allege Fairhurst participated in originated with McDonald’s former CEO Steve Easterbrook, who was accused of engaging in multiple consensual affairs with employees, Human Resources Director reports. This led to both Easterbrook and Fairhurst being fired in 2019.
Fairhurst “had an obligation to make a good faith effort to put in place reasonable information systems so that he obtained the information necessary to do his job and report to the CEO and the board, and he could not consciously ignore red flags indicating that the corporation was going to suffer harm,” Laster wrote in the ruling.
Easterbrook and Fairhurst had worked at McDonald’s for a long-time and were friends, with Easterbrook being promoted to CEO in 2015, according to Cooley, a law firm. He then promoted Fairhurst to global chief people officer that same year. “They proceeded to promote a ‘party atmosphere’ at headquarters, complete with an open bar and conduct by male executives, including particularly Easterbrook and Fairhurst, that included ‘inappropriate behavior’ and even relationships with female employees,” Cooley reports. “Given the new ‘boys’ club’ environment, Fairhurst’s human resources function was alleged to have ignored or failed to address adequately complaints about incidents of bad behavior.”
Separately, the Securities and Exchange Commission in early January charged Easterbrook with making false and misleading statements to investors about the circumstances that led to his firing. Even though McDonald’s fired Easterbrook in 2019, he and the company “entered into a separation agreement that concluded his termination was without cause, which allowed him to retain substantial equity compensation that otherwise would have been forfeited,” the SEC notes. “In making this conclusion, McDonald’s exercised discretion that was not disclosed to investors,” according to the agency.